One common theme that has appeared in posts over the past year is the intersection of administrative law in tax cases. Practitioners, academics and judges are increasingly faced with considering the implications of general administrative law principles in tax cases. The issues are more pronounced in cases that differ from traditional de novo deficiency determinations, especially CDP cases involving collection alternatives, which courts review on an abuse of discretion basis.
In Tax Court, IRS CDP decisions stand and fall based on the reasons that Appeals explains in its determination. Courts are not supposed to allow agencies to argue a new reason for their determination, or justify agency actions based upon arguments or issues that were not properly made below. Likewise, taxpayers are not supposed to raise new issues or change the basis for their relief. The burden on the IRS is akin to the other side of the coin in refund cases, where under the variance doctrine, taxpayers cannot raise new issues in a refund suit if the taxpayer failed to raise the issue in the refund claim.
Last month’s case of Bergdale v Commissioner presents the issue of the IRS trying to alter the basis for its administrative determination in the CDP context.
In Bergdale, prior to the CDP matter, the taxpayer had in 2005 and 2010 submitted offers in compromise on the appropriate Form (Form 656). Those offers were not accepted. The IRS then filed a notice of federal tax lien and gave Mr. Bergdale the opportunity to present collection alternatives to the filing of the notice of federal tax lien pursuant to IRC 6320. In the context of a CDP hearing in 2011, the petitioner attempted to make another offer and submitted financial statements and a letter with a new offer amount but did not submit a new Form 656. The taxpayer and the settlement officer had a face to face hearing. The settlement officer at the hearing stated that the taxpayer would need to offer $25,000, and the taxpayer sent a letter following the hearing raising the offer amount to $10,000. After receiving the letter with the raised but still inadequate offer amount, Appeals issued a determination rejecting the offer because it was not properly submitted and sustained the IRS’s collection determination, the filing of a notice of federal tax lien
In the Tax Court case, Bergdale argued that the IRS should not be allowed to argue that the determination should be sustained on the basis that the taxpayer failed to submit a Form 656 because that was a new legal theory not made in the determination. The court disagreed.
Carl Smith, our colleague and frequent guest poster (including yesterday’s excellent piece on CDP practice) noted in an email exchange the following relating to the opinion:
For this proposition that the IRS in court could raise a new issue the opinion cites some non-CDP (i.e., deficiency jurisdiction) cases from years ago. But, those cases are inapt because the Tax Court does a trial de novo in deficiency jurisdiction cases. In fact, in recent years, several CDP opinions of the Tax Court have applied the SEC v. Chenery doctrine, which prohibits courts from affirming agency actions on grounds not stated by the agency. I am particularly attuned to the Chenery issue in CDP, as I was the first to argue Chenery to an appellate court in Tucker v. Commissioner, 676 F.3d 1129 (D.C. Cir. 2012), and there the D.C. Cir. applied the doctrine (though it did not find under the facts a violation of Chenery). Since Tucker, a number of Tax Court CDP opinions have cited Chenery.
Carl also notes that since Bergdale case involves only collection alternatives and the lien issue (not underlying liability), it is properly only appealable to the D.C. Cir. under the flush language at the end of 7482(b)(1) (default to the D.C. Cir.) under the Byers case we have previously blogged about.
For those wanting some more background on Chenery, and a detailed analysis of its applicability to CDP determinations, I recommend Professor Steve Johnson’s article Reasoned Explanation and IRS Adjudication from earlier this year in the Duke Law Journal. Professor Johnson is one of the most thorough and articulate observer of the implications of general administrative law on tax cases. Starting at page 1781 he describes Chenery’s pre-APA status, and how its main justification is one rooted in separation of powers:
The Supreme Court [in SEC v Chenery] explained that a court “is powerless to affirm the administrative action by substituting what it considers to be a more adequate or proper basis. To do so would propel the court into the domain which Congress has set aside exclusively for the administrative agency [citation omitted]
Professor Johnson goes on to explain the differences between CDP and deficiency cases, and suggests as Carl points out that there are very different legal and policy issues underlying CDP. Precedent implicating agency explanation requirements in deficiency cases is not on point when it comes to considering agency requirements in the separate statutory scheme that is CDP.
Back to Bergdale
Getting back to Bergdale, the case is challenging because the determination apparently indicated that the “offer was not properly submitted.” (Bergdale, p. 5) The determination did not precisely state that the taxpayer was required to submit the 656, but the settlement officer did put the taxpayer on notice that he was not compliant with the formalities needed to submit an offer. Where the opinion strays is its citation to and discussion of authorities that allow the IRS to raise new theories in deficiency cases in an answer. I agree with Carl that the court’s discussion of authorities that arose in the deficiency context indicating that a taxpayer may be adequately notified of the IRS’s position in an answer misses the mark. The nature of CDP review and the Chenery principle require agency explanation to arise in the administrative proceeding, not in court pleadings or pretrial memos.
In addition to its discussion of how the IRS was permitted to argue that Bergdale failed to submit a Form 656, I find the opinion interesting and potentially taxpayer unfriendly for its narrow definition of collection alternative when a taxpayer has previously submitted a Form 656. The opinion essentially says that there was no collection alternative when the taxpayer submitted financial statements and an offer amount when no new Form 656 is submitted, or no related 656 is before Appeals. There is no doubt that the regulations under 7122 require an offer to be submitted on the appropriate form. Yet, disregarding an informal offer is potentially a trap for the unrepresented. As the opinion discusses, there is some inconsistent authority. To that end, see footnote 5 and in particular Bergdale’s discussion of Sullivan v Commissioner, where in a CDP case the Tax Court considered as a collection alternative an amendment to a Form 656 effectuated through correspondence and not a new 656. Bergdale distinguishes Sullivan (there the taxpayer had submitted a Form 656 in a CDP matter but increased the offer) but notes that it is a memorandum opinion and not binding precedent anyway. (Sullivan is interesting in its own right too as it discusses the court’s jurisdiction to consider in a CDP case a collection alternative with respect to periods that are not part of the determination; the court in Sullivan took a practical view allowing consideration of the collection alternative for years both part of and not part of the determination).
Parting Thoughts
All this puts pressure on taxpayers negotiating an offer in a CDP hearing to be sure to dot the i’s and cross the t’s. I suspect practitioners generally do not submit a new 656 when in the course of a CDP case there is back and forth with appeals resulting in a changing of the offer’s terms; the cost (time and deposit) requirements make that unattractive. Bergdale suggests strongly though that a 656 submitted outside the CDP process cannot be informally amended in the CDP hearing absent a newly submitted 656. Negotiations relating to offer amounts should not only be accompanied by correspondence but depending on the timing a taxpayer may have to submit new Form 656’s; otherwise the give and take that may take place in the hearing may be outside the scope of court review.